Food for Thought: The Do’s, Don’ts and Donut’s of Food Investing.
Julianne Brands [OVF Partner from 2016 - 2020]
Feb 2016
What: If it weren’t for the beaver, “The Foodie State” would have probably been Oregon’s nickname. Food and beverage startups in the state are proliferating, and making money, bringing in $1B in financing in 2015 alone. So, where are the returns across the food value chain? We hosted a workshop, Food for Thought: The Do’s, Don’ts and Donut’s of Food Investing, to dig in.
Who: We brought in a panel of investing experts and Oregon food & bev CEO’s with perspectives across the food value chain to dive into the unique characteristics of building and investing in food & bev companies.
David Howitt – Co-founder of Oregon Chai, CEO of Meriwether Group
Ross Shell – Red Idea Partners, Boulder, CO
Nathan Kadish –Investment strategy at EcoTrust
Glenn Dahl – Dave’s Killer Bread
Jesse Lyon – food/beverage attorney
Jake Kindrachuk – Village Family Capital
Brad Hunter – Craft 3 Lending
Steve Elliott – CFO for multiple food companies
Josh Reynolds – Gray & Co, large food processor, multiple brands
Heather Westing – former quick service restaurant industry exec
Mark Moreland – CFO, Full Sail Brewing
Stew Yaguda – Vermont Village Applesauce, Ruby Jewel Ice Cream
Josh Hinerfeld – Organically Grown Co., Yum! Brands, PepsiCo
Takeaways:
At a high level, we found that there are potential investable opportunities across the food value chain (from production to the end consumer). However, we also learned the dynamics of each segment are very unique and the food sector in general shares many of the same challenges endemic to other consumer product and service sectors. Brand development can be time-consuming and expensive and most food-related businesses tend to be capital intensive. That said, we do believe viable investment opportunities exist. Here are our top 12 takeaways.
Branded Products:
OAF and other early-stage investors should prioritize startups that...
Can be #1 in a product category, even if the category size is initially small (e.g., Oregon Chai). And...
...Can expand beyond a single product line. Winning a niche is necessary, but not sufficient. The nature of the product needs to lend itself to product line extensions - e.g., different flavors or versions.
Are in an attractive category. New and growing categories are attractive (e.g., Chai). So are disruptive brands - e.g., bringing health, nutrition, and branding expertise to categories ripe for change (e.g., the tea market before Tazo and Smith Teas, the bread market before Dave’s Killer Bread. High velocity categories (bread, yogurt, nutrition bars) are much better than low velocity (hot sauce, chocolate bars, mints). Avoid crowded categories where differentiation is difficult (nut butters, sauces, the natural food aisles)..
Are developing an authentic brand with a cult-like following. Makes marketing a whole lot easier and effective (e.g. Dave’s Killer Bread, Oregon Chai, Stumptown Coffee) as you build your company’s following.
Provide gross margins over >50%. Without margin, you don’t have mission or money. For startups, get actual pricing schedules with volume breaks on all key inputs to get a real forecast of margins at higher volumes. (e.g., Rogue Ales tries hard to be the most expensive beer on the shelf.)
Are cash producers, not cash consumers. Best to invest in companies that don’t need the money, but the funds would accelerate growth. Branded food companies with >$5 million in revenue are more likely to survive than companies in other categories (like tech or bioscience).
Can outsource manufacturing. Using co-packers (that maintain high quality) enables a brand to focus on marketing, sales, and new product development. Striking deals with strategics at an early stage who can handle backend infrastructure has also shown some promise.
Are in high velocity categories with high sell-through rates. Velocity of sales cycle (do I buy this product daily, weekly, monthly, or seasonally?), brand loyalty (how easily do I switch?), and co-packing and supply chain management are important drivers of a company’s ability to move product and drive sales.
The early-stage branded food/beverage market is to some degree a hit-driven market, where perhaps <10% of the competitors appear to generate >90% of the profits and value (think movies, music, books, apps, fashion, and other consumer categories with low entry barriers and a high number of entrants). Hence, most investment in branded food comes from private equity and strategic investors who patiently wait for winning brands to emerge from the mass of competition. And consequently, very little early stage venture capital focuses on food.
Production and Processing Startups:
1. Capital intensive and difficult to scale. Are there opportunities to develop brand equity? Technology that can be commercialized?
Ag Tech:
1. Corporate farms can be like hospitals when it comes to length of sales cycles and comfort with risk. Distribution is concentrated among just 4 major suppliers nationwide.
2. Family farms are often land rich and cash poor. Feedback cycles are long, making it hard to create minimum viable products and to quickly build-measure-learn-adapt. Inefficient channels, with fragmented distribution.
Restaurants:
1. Quick-service restaurants can scale quickly with (a) deep-pocketed investors and/or a (b) franchise model. However, the unit economics needs to be high (per store profitability > 50%, as with Subway). You have to nail it before you can scale it.